The State of the Health Club Industry in 2011

Whether it’s advertisements for shake weights or weight-loss shakes, the general public is inundated with ideas for quick-fix schemes for better fitness.

That’s the public perception of the fitness industry. Those in the fitness club industry know better. At least, club operators should know better.

Quick-fix ideas have come and gone in this industry, too. Franchisors who promise streaming memberships and instant cash have often left franchisees in ruins in only a matter of months. The club owners who have thrived and survived over the years have planned ahead, changed their course and have done whatever it takes to keep their doors open and their members coming back.

That mentality is needed more now than ever. The economy is still slowly making its way back, and if club operators are waiting for the economy to continue to improve in order to make their move, they’re going to be waiting a long time.

To successfully break away from the pack and get ahead, club owners will need to factor in the expectations of 2011 as well as 2012, 2013 and beyond. The future of each club company is bright—only if that owner makes it bright.

First, the industry must acknowledge the 400-pound gorilla in the back of the group ex room. Several industry experts are predicting the economy won’t pick back up to pre-recession levels this year.

“It’s not coming back at a roaring rate to make a marginal difference in 2011,” says Mark Mastrov, co-founder of New Evolution Ventures, Lafayette, CA, who built the 24 Hour Fitness empire and now heads the Crunch Fitness brand, among others. “Ultimately, I think you’ve got another year of difficulty. In 2012, you head towards an election year, and in an election year, people try to make things better as they want to get back in office.”

To add insult to injury, Michael Scott Scudder, consultant with Club Management Education & Training Online, Taos, NM, says that unemployment needs to return to about 6 percent in order for the country to return to a stable economy. Unemployment jumped to 9.8 percent last November.

“We’re not going to be going back to a stable economy until 2015 or 2016,” Scudder says. “It’s that serious.”

Not the prediction anyone wants to hear, is it?

But for some people in the industry, 2011 is looking better than it has in two years, if only slightly, at least according to Club Industry’s2011 State of the Industry report.

In the survey, 28 percent of respondents plan to expand their facilities in the next 12 months, a slight increase from the 25 percent of club operators who planned to expand in 2010. Of those who plan to expand, 51 percent plan to do so by expanding their existing building while 38 percent plan to convert or renovate at least one of their facilities.

More than half of the survey respondents—59 percent—anticipate revenue will increase in 2011, another hopeful sign, considering 54 percent of respondents said revenue would increase in 2010. Six percent anticipate revenue will decrease in 2011 while 30 percent say it will stay the same. (Five percent did not answer the question.)

Equipment manufacturers, however, may have a tough time convincing club operators to spend in 2011. According to the survey, club operators will spend an average of $10,000 less on equipment purchases during the next 12 months than they expected to spend in 2010. (Mastrov says equipment manufacturers will do well this year because their parts divisions will be especially busy since operators will want to re-tool old equipment rather than purchase new equipment.)

The biggest ray of sunshine, according to the 2011 report, involves membership expectations. In the report, 68 percent of respondents expect memberships to increase in 2011 compared to 57 percent in 2010. Twenty-eight percent anticipate membership levels will stay the same in 2011 compared to 36 percent in 2010. Only 3 percent anticipate a decrease in 2011 compared to 6 percent in 2010.

The numbers seem to signal that some people in the industry are hopeful. A little hope goes a long way, but how can club operators set themselves apart and come out ahead once the recession truly is over?

NEXT PAGE: LOW-PRICE CLUBS TO CONTINUE

In December, Club Industry detailed the explosion of low-price clubs during the past year. Several industry experts expect this trend to continue, at least through 2011.

And they may have Mike Grondahl, CEO of Planet Fitness, Newington, NH, to thank. The club company’s $10-per-month model, many say, spawned the girth of low-price competitors last year. Grondahl says he believes in the low-price model, but then again, he’s more than a little biased.

“We’re approaching 2.5 million members,” Grondahl says. “We’re introducing a lot of people [to fitness] that wouldn’t have been introduced to fitness.”

That may be true, but Stephen Tharrett, president of Club Industry Consulting, Highland Village, TX, says that rather than pulling in the deconditioned or the new-to-fitness market, low-priced clubs actually attract the avid exercisers who would rather not be bothered while working out. Furthermore, Tharrett says that if price points are staying the same or dropping, the only way for club operators to increase revenue is to increase memberships.

“If you are lowering the price point, you are bringing in people who are less willing to spend more on additional services,” Tharrett says.

Indeed, as the State of the Industry report indicates, despite the trend to low-priced clubs, only 3 percent of club operators plan to decrease dues pricing in 2011 while 18 percent plan to increase it.

Tharrett’s observations stem from a change in the consumer buying index as a result of the recession. He does not expect those buying habits to return to pre-recession levels if and when the economy starts to build again.

“They’ll be more conservative and make more educated decisions,” Tharrett says about consumers.

Scudder adds: “This industry is more economy and consumer attitude dependent than it’s ever been. How seriously will the American consumer guard his or her pocketbook? There’s a psychological factor that really plays on consumer buying habits. I don’t sense a direction yet.”

So does that mean that all club operators should lower their prices? Or should they add more ancillary services? Grondahl, for one, says club owners should focus on the environment of the clubs and on their members.

Another club executive goes one step further, saying club operators should not focus on ancillary services altogether.

“This is a business that is complicated because people make it more complicated,” says the club executive, who did not wish to be identified. “The whole point of this business is keep it simple. Don’t try to run juice bars. Don’t put in a retail component. Don’t put in massage therapy. Don’t put in medical doctors. People are constantly trying to find a way to recreate the wheel.”

Focusing on those and other ancillary sources of revenue, the executive says, takes a great amount of time and energy away from the bread-and-butter of the industry: membership sales. Ancillary services are part of a tangible market. Selling fitness—the idea of getting healthy and looking good—is intangible, he says.

“You look at your product mix and you say, ‘What’s the most profitable? Where is my most volume?’” he says. “If 20 percent of your products are doing 80 percent of your sales, that’s what you’re going to want to concentrate on, especially if the cost to get sold is zero.”

Bringing the focus back to membership sales takes a lot of effort. Mastrov says that LA Fitness, Irvine, CA, is one club company that uses this model well.

“If you look at LA Fitness, they’re still using the old sales model, hustling in the community, which is one of the reasons I think they’ve been the most successful out there,” Mastrov says.

NEXT PAGE: THE FUTURE OF MOM-AND-POPS

The hustle factor. That’s a trait commonly found in the single-club operator, the mom-and-pop club owner, if you will. The fear has been, over the last few years, that the big-name brands with bigger advertising budgets and lower prices have been squeezing out the mom-and-pops. But as long as the single-club operators have that hustle factor, as long as they maintain community relationships, they will have a place in the industry, Mastrov says.

“Provided that they’ve got a good lease, a long-term location and a good member base, they should perform well,” Mastrov says. “I’m not seeing that landscape change. Maybe we’re seeing fewer people opening fitness centers now than in prior years, but that’s probably a smart thing.”

“You’re not seeing 10 to 20 percent growth for the big guys,” Mastrov adds. “You’re not seeing 24 Hour, Bally, LA Fitness opening up 50 stores a year anymore. You’ve seen everybody pare way down, and I think that’s probably good business to do so.”

For those club operators who have some cash stashed away, now is as good a time as ever to acquire property, many in the industry say.

The closings of such supermarkets as A&P, Albertsons and Winn-Dixie across the country have left a lot of big boxes available. Strip-mall landlords understand the traffic that a fitness club can bring to their centers.

“We used to be a pariah,” Grondahl says. “Landlords, the last thing they wanted was a health club, but now with so much vacant space, they’re coming to us. All of a sudden, the rest of the center fills up because it looks busy. Right now is just a very, very good time to be coming into the industry. Deals right now are cheaper than they were in the ’90s. It’s a tremendous time to grow if you have money.”

Scudder adds that it’s also a great time for club owners to refinance leases.

“Landlords don’t want to lose clubs because they now know that there’s no secondary market,” Scudder says. “With money as tight as it is, they don’t want to have to take over a space and either try to re-market a health club or take over a space and have to renovate it and re-lease it to another type of business in a very difficult time to do that.”

With all the focus on the low-price clubs and the fate of the mid-priced clubs, it’s sometimes easy to forget how the high-end clubs might fare in a struggling economy. Higher-priced studios that offer group exercise, yoga or recumbent bikes will do well, too, in 2011, industry observers say, mainly because people who belong to a high-priced club are simply willing to spend money.

In addition to items such as personal training, group exercise or other forms of programming, one of the trends for 2011 found on fitness organizations’ lists is a tie to the wellness industry. The 2010 International Health, Racquet and Sportsclub Association (IHRSA) Global Report showed that global industry revenue reached $67.2 billion in 2009—$23.1 billion for North American clubs. By comparison, health and wellness industry sales were $125 billion in 2009, according to the Natural Marketing Institute. At least one economist, Paul Zane Pilzer, predicts the wellness industry will one day reach $1 trillion.

Whatever the size of your clubs, whether they be big boxes, small boxes, high-priced boxes or low-priced boxes, it’s time to begin to think outside that box in 2011.

“This may be the year that what used to be—the practice of fitness in clubs as we have known it—really shows its age and its cracks in the armor,” Scudder says. “I hope it is, because then that’s going to birth something that will be so much more valuable to people.”